Every derivative in the program falls into one of two shapes, and the shape decides more about the instrument than the underlying does.
A forward commitment binds both parties. A forward, a futures contract and a swap are all agreements to transact later at terms fixed now. Nobody pays a premium at inception, because the terms are set so that the contract is worth zero to both sides on day one. A par swap rate and a fair forward price are the rates at which that holds. What follows is symmetric: as the underlying moves, the contract becomes an asset to one party and a liability of exactly the same size to the other. A payer swap struck at 5.25% when the forward is 5.1266% is worth minus $254,574.88 on $50 million before anyone has done anything wrong.
How do the two families differ?
A contingent claim binds one party only. The buyer of an option, a cap, a floor, a swaption or credit protection acquires a right and pays for it in cash at the start. The seller receives that cash and takes on an obligation that only ever costs money. The payoff is asymmetric by construction, and so is the credit exposure: once the premium has been paid in full, the buyer has no further obligation and the seller has no exposure to the buyer at all. Where the premium runs rather than settling up front, as it usually does on a credit default swap, the seller keeps an exposure to the buyer for the unpaid remainder of the stream.
That asymmetry is why the two families are documented, collateralised and regulated differently, and it is why a treasurer choosing between a forward-starting swap and a payer swaption is not choosing between two prices. One choice costs nothing and removes the possibility of a good outcome. The other costs a stated sum and preserves it.
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Which instruments fall in each family?
Here is the taxonomy with the instruments this program teaches slotted in.
| Family | Instruments | Paid at inception | Payoff | Credit exposure |
|---|---|---|---|---|
| Forward commitment | forward, futures, forward rate agreement, interest-rate swap, currency swap, equity swap, forward-starting swap | nothing (struck at fair terms) | linear and two-sided | both ways, and it grows with the move |
| Contingent claim | call, put, cap, floor, collar, payer swaption, receiver swaption, credit default swap | a premium | asymmetric, capped for the buyer | one way after the premium is paid |
Two entries deserve a second look. A collar is a bought cap and a sold floor, so it is a contingent claim on each leg and a forward commitment in aggregate whenever the two strikes coincide. And a credit default swap carries the word swap and is a contingent claim, because the protection buyer pays a running premium for a payment that occurs only on a credit event. Names in this market were not assigned by a taxonomist.